How to Use a Business Line of Credit
When to draw, when to hold back, how to use revolving credit to maximize cash flow, and the mistakes that turn a line of credit into a liability.
How a Business Line of Credit Actually Works
A business line of credit is a revolving credit facility — you're approved for a maximum amount, draw what you need, repay it, and draw again. You only pay interest on what you've drawn, not on the full approved limit.
This is fundamentally different from a term loan. A term loan gives you money upfront and charges interest on the full balance from day one. A line of credit is a tool you pick up and put down as your business needs it.
Example: Approved for $100,000 line. Draw $30,000 for payroll. Pay interest only on $30,000. Revenue recovers, you repay $20,000. Available credit goes back to $90,000.
The Right Times to Draw
The line of credit is most valuable as a bridge — not a permanent source of capital.
Draw when:
- You have confirmed receivables coming in but need to cover payroll or expenses now
- A supplier is offering a significant early-payment discount (e.g., 2/10 net 30) that exceeds the interest cost
- You have a short-term opportunity — a bulk inventory purchase at discount, a piece of equipment at auction
- An unexpected expense arrives that would otherwise disrupt operations
Do not draw when:
- You need capital for a long-term investment — use a term loan or equipment financing instead
- Revenue is declining and you're not sure how to repay — borrowing to cover operating losses is a spiral
- You're already carrying a large balance and can't service the additional draw
- The use is unclear or speculative
The Cardinal Rule of Revolving Credit
A line of credit should never be fully drawn and left sitting. A maxed-out line of credit is expensive (you're paying interest on the full balance) and signals financial stress to future lenders. Many experienced business owners treat the line like a fire extinguisher — always available, rarely used, never discharged unless necessary.
How Lenders Review Usage When You Apply for Other Financing
When you apply for a term loan or SBA loan, lenders will look at your line of credit usage. Consistently high utilization (over 70% of your limit) is a negative signal. Consistent draws and repayments with moderate utilization show healthy cash flow management.
Common Mistakes
- Using it for long-term capital needs. A line of credit at 15–20% interest is a poor substitute for a 5-year term loan at 10%.
- Never paying it down. If your balance never decreases, the line has become a crutch, not a tool.
- Treating the available credit as revenue. It's not. Every dollar drawn must be repaid with interest.
- Not knowing the terms. Does your line have an annual renewal? A draw fee? A non-use fee? Read the agreement.
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